New US sanctions create panic, India’s oil imports from Iran could be hit hard from Feb 6

Jan 25, 2013, 09.09PM ISTTNN[ Indrani Bagchi & Sanjay Dutta ]

As the sanctions regime against Iran is extended to impact all its overseas earnings, its bound to cast a longer shadow over Iran-India ties as well.

NEW DELHI: India's oil imports from Iran could take a severe knock as a new set of US sanctions kick in from February 6. India will no longer be able to route oil payments to Iran through the Turkish Halk Bank that has been the norm over the past couple of years.

Instead, India will have to pay for Iranian oil in local currency which will have to be kept in an Indian bank. India already pays 45% of its oil payments in rupees, which is kept in UCO Bank. After February 6, Iran will not be allowed to repatriate its foreign earnings except to buy goods from the country concerned. This could prove to be a problem all by itself particularly as Iran now has over $5 billion in rupees in the bank.

The new set of sanctions come about as a result of the amendments to the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRSHRA) by the US treasury department. For the first time, a US company can be penalized if its foreign subsidiary is found to be dealing with Iran government entities. This will extend the scope of the sanctions regime to even tertiary players in the international market.

India has already reduced its oil imports from Iran, which now makes up just under 10% of the import mix. India bought about 17 million tonnes in 2012, which is expected to come down to 14 million tonnes by end-March. India is also one of the few countries to get sanctions exemption by the US state department which is expected to be extended again. As the sanctions regime against Iran is extended to impact all its overseas earnings, its bound to cast a longer shadow over Iran-India ties as well.

By July 1, 2013, a further set of sanctions are expected to kick in — the Iran Freedom and Counter-Proliferation Act (IFCPA), which will invite US sanctions against any entity, US or non-American that is involved in energy, shipping or ship-building sectors in Iran, or, more importantly is a port operator in Iran. The new sanctions might impact India's plan to develop the Chabahar port in Iran, which has big stakeholders, including Afghanistan that expects to benefit from the port.

India intends to develop the port with the Iranian rupee funds parked in an Indian bank. However, this might run into trouble if Iran is only allowed to import goods from India. Theoretically, this may positively impact Indian exports to Iran, but Tehran has been traditionally reticent about importing goods from India. Indian officials have been in Iran recently to try to expand the export basket, but with little success.